Astec bullish on pellet plant market outlook

Though some design flaws at two of the large-scale wood pellet plants Astec delivered required unexpected investments this quarter, CEO Benjamin Brock said the company is still confident in the sector and its place in the company’s future.

The design fixes collectively resulted in a negative impact of 59 cents per share impact for the quarter and year-to-date. The design upgrades, which Brock described as significant, were announced in early October, following a 45-day assessment. “Upon learning those flaws, design flaws that were different at each plant, we identified a clear path at both sites to achieve the necessary results for our customers in the near term,” Brock said. “…we have a high level of confidence that we have identified the issues, and are underway in making the necessary upgrades to achieve full production in Georgia and Arkansas.”

Brock reminded investors that Astec’s financial investment in the pellet plant business started in December of 2010, when it opened a work order to design, build, direct and run a prototype pellet plant on property at its Astec Inc. subsidiary. The prototype plant began operating in September 2011, he said, and ran through May of 2012, giving Astec confidence to pursue a larger order, which was the Hazelhurst plant, completed in early 2014. “The market conditions of the plant was not [conducive] to run at full capacity, and it was also run with natural gas as a main fuel source,” Brock said, adding that market conditions have since improved, and as a result, the plant now needs to run at full capacity with wood as a fuel source. “As we've looked to ramp up production rates, the series of design flaws were uncovered, and we're working diligently to correct them now,” he said.

Astec’s experience at the Georgia site gave the company confidence to pursue an even larger order at Highland Pellets in Arkansas, Brock said. “The last segment of that order was received in March of 2016,” he said. “This plant also has been running at low production rates, and as we ramped up production, we found design flaws as well, which are different than those we are experiencing in Georgia.”

While the design issues are not identical at both sites, they each require full attention and effort to get the plants into the full production, and Astec is on schedule to complete the upgrades, according to Brock. However, the unforeseen expenditures have not diminished the company’s outlook on the pellet plant industry. “Despite the announcement on Oct. 2nd, we are very confident in the near-term and long-term outlook for pellet plants, and our success at these sites will put us in a strong leadership positions for orders as we move ahead,” Brock said. Including the additional investments in correcting the Arkansas and Georgia plant flaws, Astec will have invested approximately $31 million over seven years, with intent to get into a $100 million-per-year business.

“We believe that the investment is a good one for our company,” he added.